22 minute read
Fireside chat | Ticky Fullerton and Sir Rod Eddington AO
Key points:
• Global sentiment towards open trade is challenging the liberal trading regime in ways never seen before. • Organisations need to take a long-term view of hard and soft infrastructure when considering investments. • Context and understanding are crucial for the media to discuss issues in the infrastructure sector.
Panellists:
► Sir Rod Eddington AO, Chairman,
Infrastructure Partnerships Australia ► Ticky Fullerton, Australian business journalist
Ticky Fullerton (TF): Sir Rod, you are across infrastructure and so many different sectors of the economy. I want to talk about Australia as an investment compared to elsewhere in the world. Regarding all of the current tensions in the world, what really worries you?
Sir Rod Eddington AO (RE): For most of my business life, I have believed that free trade and an open trading environment lifts benefits the most. It doesn’t mean that there aren’t some losers in that environment, and you need to think carefully about it. Most of my business life was in Asia, and I saw what liberal trading regimes did in many Asian countries. It has lifted about 500 million people from the lower class into the middle class.
What worries me is that we currently live in a world where the premise on which my working life was based – things like open markets, and the free flow of goods and services – is being challenged in a way that it’s never been challenged before. It’s most visible in the US–China trade issues.
Many years ago, a French economist said that if goods and services don’t flow across borders, soldiers will – and that’s broadly right. The thing about most of my time in Asia was the economic success, which has been the story of the last 50 years. It started with Japan, followed by Korea and China, and it’s been based on peace in the region. The Korean War finished in 1953; the Vietnam War was clearly a conflict of consequence, but it didn’t have an impact on trade. Peace has led to trade and free trade has led to peace, and it’s being challenged now.
TF: The starting point for the tensions between China and the United States was a spat over technology intellectual property (IP). Donald Trump might argue that this is not a war
Ticky Fullerton
that’s going to end militarily. He’ll argue that this is the art of a deal and is resetting what the negotiating positions of two parties should be. Does that argument have any merit?
RE: There’s some merit to that. In fact, on the IP front, it’s clear that you could argue that China is a great imitator of other people’s ideas, like Japan and Korea before it. My own view is that China will naturally come to a point where it values IP because it will want to protect its own.
I think President Trump is right to push China on several fronts, but at the end of the day, we need the two sides to agree. Because if all that happens over a period is a tit-for-tat tariff war and other forms of economic headbutting without a resolution, everybody loses.
I think we’re beginning to see that now. Wherever you look in the world, projections for economic growth are coming down. J.P. Morgan lowered its expectations for the US economy recently. A chunk of that is based on the ongoing conflict with China. Both sides have to find a resolution.
TF: From a pragmatic point of view, Donald Trump is nothing if not pragmatic. Do you have confidence that in the end, sense will prevail?
RE: Yes, I do. What I don’t know is when they’re going to reach an agreement. I think there’d be a Nobel Prize in it for anyone who had the answer to that! I have a view that this is going to go on over a longer rather than a shorter period of time.
TF: Going back to the technology side, given the developments with a business like Huawei and the Five Eyes’ reaction – being Australia’s very strong reaction to Huawei – do you see the tech side and the digital side developing in two completely different markets where there’s a Chinese internet and market, and a Western one?
RE: It would be a great shame if that were true. I’m old enough to remember when we had duelling technologies. It would be a great sadness if we ended up with a China-centric system and a Western-centric system. The British, for instance, are much more pragmatic about Huawei. They won’t have Huawei at the heart of any of their intelligence systems, but Huawei is widely available. It won’t be that all Western countries will reject Huawei.
TF: Why do you think Australia has been so much tougher than the United Kingdom?
RE: In order to ban Huawei, you’ve got to believe two things. The first is that the Chinese can embed malware into their systems and their technology that we can’t detect. The second is that you must believe they have malevolent intent. I don’t think the United Kingdom believes that. If it did, it would ban Huawei, too.
TF: Is it the geography or where we sit in the world, as well?
RE: No, it’s more about the insight that your technologist and your intelligence and security services have. It’s clear that the United Kingdom and the United States have a different view about this. I hope it plays out in a way that reaches a settlement.
One of the problems in China is that there’s still a substantial degree of state ownership in many of its businesses. This isn’t true for Huawei, but it’s true in other businesses. Others will be instinctively worried that if a foreign government owns part of an economic entity and that entity is invested in, or has control of, economic infrastructure, then that entity will be subject to government pressure. I get that. The state-owned enterprises in China are themselves causes for concern in many circles.
TF: Can I ask you about soft power? One of the great tools for soft power is infrastructure. We’ve got a relatively expansionist China now in the region in terms of infrastructure developments. Is Australia’s response meaningful enough to have the soft power that we would like to have from a security point of view, particularly in the South Pacific?
RE: We thought this about Japan 40 years ago. My parents’ generation had lived through the Pacific War, and the Japanese were coming and getting involved in our economy in a substantial way. That was confronting and controversial at the time. But having lived in Japan for four years, we look back on the concerns we had, and they didn’t amount to anything.
Regarding China, the challenge for Australia is that since European settlement, our major trading partners – firstly Britain, then America and Japan – were all strategic partners. For the first time since European settlement, our major trading partner, China, is not a strategic partner. To make things more difficult for us, our major strategic partner and China are now trying to sort out their differences, which are material and significant.
TF: Are we right to be strengthening the alliance?
RE: The bottom line is that we should recognise that the United States is our most important strategic partner, and that China is our most important trading partner. We must recognise the reality and manage it. The idea that you somehow must choose between one and the other is, at best, naïve.
TF: Sir Rod, you’ve lived in Hong Kong. Were you expecting something like this at some stage down the track?
RE: Four years ago, there were some significant demonstrations with the Occupy Central group, which was basically about a group of students who felt strongly about a series of issues.
This time, it wasn’t just the young people who came out onto the street – it was people from all walks of life. It’s clear what the catalyst for that was, with the Chief Executive trying to introduce an extradition treaty from Hong Kong to China. That was not a sensible thing to do – that’s what provoked a whole series of people on to the streets.
Now, there can never be any excuse for the violence we’ve seen in the last six weeks. Petrol bombs and rocks have no place in any sensible dialogue about a way forward. That’s not only created enormous difficulties for people and businesses in Hong Kong – including Cathay Pacific, the airline I once worked for – but the hotels are empty, as is the airport. The economic consequences are huge. I worry for the people of Hong Kong, old and young, because their economic futures are tied up there.
TF: What are you hearing from business in Hong Kong? It was interesting that the Hong Kong stock exchange made a bid for the London stock exchange. I wondered, given that the likelihood of that actually happening is rather remote, whether that wasn’t also a bit of a cry for help from business in Hong Kong?
RE: I suspect they’ve been running the slide rule over the London stock exchange for some time. I first went to work in Hong Kong in the late 1970s. In 1967, there were terrible riots in Hong Kong during the cultural revolution in China, and people thought the People’s Liberation Army would come across the border. In 1967, the riots went on for months, and 50 people were killed and 1000 badly injured. They were devastating, but Hong Kong recovered and bounced back. It is a resilient place.
TF: If there was military entry by China, should Australia be thinking about taking people in from Hong Kong?
RE: I don’t believe for a moment that that will happen; I think that’s the last thing that China would want to happen. I think China expects the people of Hong Kong to resolve these matters for themselves. That’s what one country, two systems is about.
This was designed to provide an interregnum, and in a pragmatic sense, it’s a workable solution, but the current impasse must be resolved.
TF: Back to infrastructure. When that drone landed recently in Saudi Arabia, blowing up critical oil resources, it seemed to be a massive wake-up call for everybody. This year, we also had a drone around Gatwick Airport in Britain. How vulnerable do you think critical infrastructure all over the world is to these sorts of attacks? What is the sector doing about it?
RE: We’ve always been vulnerable. Western liberal societies have a modus operandi that is open. We don’t want to live in a police state, so we will always be
Sir Rod Eddington AO
vulnerable to evil actors. The question is, how do we protect against them? Drones are a good example. This isn’t about spying into someone’s backyard; it’s something much more malevolent than that. As you say, the fact that drones were able to close Gatwick Airport in the United Kingdom and disrupt thousands of people’s travel plans is an example of what can happen.
There are many other examples of malevolence in the context of particular systems – whether it’s hacking customer information or stealing content online. There are so many things about the modern technological world that are vulnerable unless we can protect them. I don’t want to live in a police state, so we need to strike the right balance here.
TF: Regarding Australia as an investment destination, the Federal Treasurer recently came out with his budget statement, declaring that we’re in balance now. Is the budget surplus important?
RE: There’s another question to consider here, and that is: how should we use that budget surplus? What Australia needs to do is have well-controlled financial systems, because that attracts foreign capital. Are we an attractive inbound destination? Australia is, and always has been, resource-rich and capital-poor, so we’ve always been a net importer of capital. Unless we are seen as a favourable destination for inward capital investment, it will go elsewhere.
I always say, ‘Capital is a coward. It goes where it gets best treated’. We don’t have any right to demand that the Japanese, Chinese, Americans, British, French, or Germans invest in our country. But we do want them to, because it helps to create opportunities to grow our business and generate employment.
TF: Where does infrastructure sit in the pecking order when it comes to attractiveness for the private sector?
RE: Well, it’s interesting. Consider it from this perspective: if you’re an American company and you want a large Asian footprint, where do you choose to base your regional headquarters? Do you do it in Singapore or Hong Kong? Do you do it in Sydney or Melbourne? Where do you do it? The matrix says that you think about education and housing for families. You think about the rule of law, political stability, the proper treatment of capital, including corporate tax rates, and the availability of a skilled workforce. All these things make up the decision tree for organisations deciding where they’ll set up.
In Australia, we get elements of this wrong from time to time. As a whole, we’re a pretty attractive destination for capital and people. In many cases, people come and live here even though they could live in a tax-free world in the Middle East or a low-tax environment like Hong Kong.
TF: Why infrastructure? Do you think it’s going to provide investors with big licks of money?
RE: Organisations take a long-term view of hard and soft infrastructure. It’s important to look at both social infrastructure and hard infrastructure like ports, airports, and roads. There are plenty of companies that look at our best companies – for example, BHP and Rio Tinto – and say these are worldclass organisations. Investors look and say we could invest in South America, we could invest in mines in Africa, but they still choose to invest in mining in Australia.
The challenge is to ensure that we have other things that are worth investing in, as well. Tourism is now a major employer in Australia, and is the third-largest export earner alongside education, after coal and iron ore. People invest in hotels. They invest in tourism businesses. They invest in our food businesses because we’re a quality supplier of food.
TF: As an alternative to the equity market, do you think that, given the economic environment, infrastructure is more attractive than it was 10 years ago?
RE: It depends. The best investments in infrastructure have been in areas where governments have chosen to recycle existing infrastructure. The privatisation of the airports, Port Kembla and Botany, and the Port of Melbourne are good infrastructure investments. But we all know that investing in greenfield sites, where you take construction and patronage risk, is a very different game.
TF: How much damage to investment do you think the government has done by intervening in markets in this country?
RE: The road to hell is usually paved with good intentions. I believe in markets. I don’t think markets are perfect, but there are a lot.
TF: We’ve got this ‘big stick’ legislation that is in play in the energy sector now.
RE: Pretty much everyone other than the government of the day thinks that this is a bad idea. The Australian Competition
and Consumer Commissioner doesn’t think it’s a good idea – it’s not just the people in the space.
I understand why people worry about energy prices, but you must ask the question, what’s driving them? Is the ‘big stick’ legislation the answer to the problem, or does it create other problems? I worry that in an industry that requires a large capital inward investment, governments interfering in markets strangles investment. I worked in the airline business, and Qantas is a much better airline in the private sector, living with the disciplines of capital markets, than it was when it was a state-owned entity.
TF: We’ve had a lot of very prescriptive directives aimed at business recently. Where do you sit with this? Again, in the context of quite a lot of intervention happening in different sectors by the government.
RE: I’m no longer a chief executive. I no longer make payroll. The best people to speak about this are people like Alan Joyce and Andrew Mackenzie at BHP.
I believe in the primacy of the market, and we have a lot of good, well-run companies in Australia that are constantly juggling several competing interests to find a way forward. I grew up in the airline business, and if you didn’t look after your customers and your staff, then your business failed. In order to deliver good, long-term economic returns, you have to look broadly, and it’s true in spades today.
TF: Is this post-Hayne overkill? Is this an overreach?
RE: I think so. A lot of good chief executives and management teams in big businesses naturally think about community interest, environmental interest, customer interest and staff interest. They know that if they strike the right balance across that landscape, they’ll deliver great returns for their shareholders.
To the second part of your question, which is the role of government in this; in my experience, government has some very important levers to encourage investment – the corporate tax rate and depreciation policies, for example. Governments get better outcomes by pulling those levers rather than jawboning business.
But now it’s your turn, Ticky. What do you think about the current relationship between business and the government?
TF: It’s one of its most tense moments in the 30 years I’ve been doing business journalism. Let’s face it, business is partly responsible for that, given some of the behaviour we saw with the Banking Royal Commission. This has combined in a nasty way with the populist backlash.
For instance, it’s easy to have a go at Alan Joyce for the money he makes, but no-one asks that of a footballer or pop star. Quite frankly, if you’ve got a big company that is a flag carrier and you want it to grow, would you be prepared to pay that man as much as you’d pay the best striker in Australia? It depends. The problem is that people aren’t pitching things in context. Context in journalism is hugely important.
RE: I also worry about the current state of play. You seem to get more popular appeal by criticising business than trying to find a way to work with it. But it is critical for government and business to find common ground and make it work.
TF: The media has its own role to play here. It’s been very difficult in the media, particularly in business media, where there’s not a lot of investment.
Take infrastructure, for example. It’s an incredibly difficult sector for journalists to understand. It’s hard when you go to the different groups that run your sector to understand who’s owned by government and who isn’t. Everyone says they’re independent, and they all seem to be called the same names with the same acronyms. A lot of them hate each other, and there are plenty of egos.
RE: It’s very difficult. Business must take some responsibility for that. If you’re running a business, you need an honest and understandable narrative about what you’re doing and why you’re doing it. I’ve always described it myself as you need a good story, well told. In the absence of that, people will make things hard.
Sir Rod Eddington AO – Chairman, Infrastructure Partnerships Australia
Rod Eddington is Chairman of Infrastructure Partnerships Australia, Chairman of J.P. Morgan’s Asia Pacific Advisory Council, and Non-Executive Chairman of Lion. Sir Rod previously served as the inaugural Chair of Infrastructure Australia from 2008–2014. Educated as an engineer at the University of Western Australia and then Oxford University as Western Australia’s 1974 Rhodes Scholar, Sir Rod’s career began in transport and aviation, and he went on to become CEO of Cathay Pacific, Ansett Airlines and British Airways, before retiring in late 2005 and returning to Australia.
In 2005, Sir Rod was awarded a Knighthood by the British Government for service to civil aviation; in 2012, he was made an Officer of the Order of Australia (AO) for service to business and commerce; and in 2015, he was honoured by the Japanese Government with the Grand Cordon of the Order of the Rising Sun for his contribution to strengthening the economic relations between Australia and Japan. Sir Rod serves as a member of the APEC Business Advisory Council and is President of the Australia Japan Business Co-operation Committee. He also sits as a Non-Executive Director on the Board of China Light and Power Holdings and John Swire and Sons Pty Ltd (Australia).
Ticky Fullerton – Business journalist
Ticky Fullerton is Sky News Business Editor and co-anchor of Business Weekend, Sundays at 11am on Sky News Australia. Ms Fullerton has over 20 years’ experience in television at Sky News and the ABC. She was previously an investigative reporter with Four Corners, a political reporter in Canberra, and presenter for the national farming program Landline.
NAB thinking long term for bold infrastructure future
Leading infrastructure bank is well placed to help clients and communities.
National Australia Bank’s (NAB’s) Jaron Stallard says the future of infrastructure will be built on technology, sustainability and collaboration. It’s a future that requires new thinking to build world-class infrastructure that benefits current and future generations.
Stallard, NAB’s Global Head of Infrastructure Coverage, says the federal government’s Australian Infrastructure Audit 2019 is an important step in this direction. The Infrastructure Australia report emphasises the need to integrate future trends in infrastructure planning.
‘Stakeholders involved in constructing a new motorway today, for example, must consider how the asset will adapt to autonomous electric vehicles in coming decades, and how the motorway will capture and analyse data from autonomous vehicles to improve traffic flows and link with other transit systems in an integrated, on-demand transport model,’ says Stallard.
Long-term infrastructure planning will extend to sustainability initiatives, says Stallard. ‘How can assets built today enhance sustainability outcomes for the community? In cities, how do we best incorporate natural elements and renewable technology, and minimise the need to travel by car by providing cycling, walking or other sustainable transport options?’
Stallard’s colleague, Phillip Mak, says future infrastructure will require greater stakeholder collaboration. ‘Increasingly, larger projects will affect federal, state and local governments,’ he says. ‘In addition to public funding, these projects will require greater private-sector capital from domestic and international providers. There will also be more participants at the project’s operational level. The ability for stakeholders to understand each other’s needs and work together to get the best outcome will be critical.’
Mak – Global Head of Infrastructure, Specialised and Acquisition Finance at NAB – says collaboration will be needed to allocate infrastructure resources efficiently. ‘The $200-billion infrastructure project pipeline is the biggest Australia has seen and is mostly focused on the east coast. Stakeholders must consider how best to deploy raw materials and other services, and avoid a bottleneck that drives up prices and stalls project momentum.’
Mak says infrastructure collaboration must extend to the community. ‘More than ever, infrastructure stakeholders need to engage the community on a project, listen and respond to their needs, and bring them on the journey. In this era of social media, stakeholders need a more consultative approach to the community and a willingness to adapt to their views.’
Stallard says social equity issues should be included in infrastructure planning. ‘If Australia embraces a larger user-pays model for infrastructure funding, we must consider how those on lower incomes will have fair access to these assets. How do we make user-pay transport accessible for people who can’t afford the cost every day? How can we best fund regional infrastructure in centres without a large enough population to support a user-pays model?’
Social infrastructure should be part of this debate, says Stallard. ‘We can’t just build more roads and rail lines. As our population expands, we need to plan for new hospitals, schools, parks and social housing that are required to make Australia more livable, sustainable and equitable.’
Jaron Stallard, Global Head of Infrastructure, Client Coverage, Corporate & Institutional Banking, National Australia Bank Phillip Mak, Global Head of Infrastructure, Specialised & Acquisition Finance, Corporate & Institutional Banking, National Australia Bank
NAB’s infrastructure innovation
This thinking is reflected in NAB’s infrastructure strategy and its recent success. NAB is the country’s topranked infrastructure financier, and is in the top 10 globally. The bank arranged $4.2 billion of funding across 64 deals globally in 2018, according to IJGlobal.
NAB has also built a leading position in digital infrastructure, which includes networks that transport data and data centres that store it. The transition to cloud-based services, big data technology, the continued infilling of mobile spectrum and the 5G network rollout, smart manufacturing, and electronic payment systems are driving demand for this infrastructure.
‘Digital infrastructure is rapidly becoming a bigger part of overall infrastructure needs, and NAB has built an extensive team to finance the digital economy,’ says Mak. ‘We are arranging funding for core-plus digital assets – such as data centres, broadcast towers, fibre cables and telecommunications – and helping clients access these opportunities.’
Funding for renewables projects is another strength. NAB is the topranked arranger of project finance in the Australian renewables market, and has a specialist clean-energy team in its infrastructure division. Stallard expects NAB to issue more sustainability-linked loans (SLL) for infrastructure projects. NAB in July 2018 provided the Pennon Group, a UK-based environmental infrastructure utility, with an environmental, social and governance (ESG)-linked term loan of £100 million. NAB was also part of a syndicate in a landmark $1.4-billion SLL this year for Sydney Airport.
‘NAB is passionate about the potential of SLLs to incentivise companies to achieve better sustainability outcomes,’ says Stallard. ‘Factoring ESG targets into funding can enhance the long-term sustainability of infrastructure, and help it meet community expectations.’
Looking ahead, NAB intends to consolidate its top-10 global infrastructure position, and is expanding in the United States, Europe and the United Kingdom. In 2017, NAB committed $100 billion to infrastructure finance over seven years.
Stallard says the Australian Infrastructure Audit 2019 emphasised the need for a bolder infrastructure approach. ‘We must reimagine Australia’s infrastructure future. What worked in the past won’t work as well in the future given the expected population growth and other developments, such as changing technology and user expectations. NAB has a proud history of innovation in infrastructure funding, extensive local and global experience, and a marketleading position. Together, that helps NAB drive successful infrastructure projects that benefit communities.’ ♦
